'DIY' offshore outsourcing on the increase

Buyers less reliant on outsourcing companies

Four out of five large UK companies will increase their offshore outsourcing over the next two to three years - but many will go for a DIY approach rather than using outsourcing companies.

Outsourcing advisors TPI said that large companies offshoring to low-cost locations such as China and India are increasingly setting up their own operations, known as 'captives', rather than using external service providers.

Fifteen companies in the FTSE 100 now have captive operations in India.

TPI's international managing director Duncan Aitchison said the shift comes as the market matures and IT buyers become more aware of how to conduct offshore operations themselves.

"Buyers are increasingly employing hybrid models that mix some outsourcing with some 'do-it-yourself' offshoring, and where external providers are engaged, it is for more complex reasons than simple cost reduction," he said.

According to TPI's calculations, the total headcount of the top 20 captive operations has increased by almost three-quarters in the last year - from 54,666 in 2003-04 to 95,225 in 2004-05. In contrast, the total number working in India in IT and business process management has increased by just one-quarter over the same period.

Aitchison added: "The build-operate-transfer model is also coming into vogue, particularly in IT outsourcing, with companies using third parties to set up a development team, manage it and finally transfer it - essentially to create a new offshore IT department."

But half of the companies surveyed plan to bring some elements of their services back onshore in the next five years.

Aitchison said this reflects the maturing market, with companies looking at keeping customer-facing functions onshore to keep customers happy but offshoring the transactional processes.

While India continues to be the favoured destination for offshore development - used by 75 per cent of those surveyed - central and eastern Europe is used by 28 per cent, and 25 per cent use China.

Companies using offshore remain happy with the quality - 60 per cent said Indian outsourcing offers a service to rival western providers irrespective of any cost savings.

Only four per cent of buyers are dissatisfied with their outsourcing arrangements, compared to 42 per cent who are "very satisfied".

TPI surveyed 100 senior executives responsible for outsourcing at UK companies with an average turnover of £85m and 5,000 employees.